John Tomblin,,


Appraisers have numerous valuation tools in their cache when it comes to appraising homes. These include the “Sales Comparison Approach,” the “Income Approach,” and the “Cost Approach.” For most residential appraisals, the Sales Comparison Approach is the most widely accepted and reliable indicator of value. But what does an appraiser do when the appraisal assignment is more complex and, because of the home’s size and features, has limited sales comps?

For luxury homes, the variables can be daunting. The more complex a property’s features and amenities, the fewer the number of acceptable comps. To complicate matters, most lenders require that at least three sales (comps) no older than six months be included in the report, but that’s sometimes easier said than done. What about a luxury home that’s 20,000 square feet? Or perhaps the subject property is a condo unit on the top floor of an L.A. high rise. Maybe the home is six stories tall, or the property overlooks downtown Phoenix.

Once the appraiser has inspected the property, drawn the floor plan, calculated the square footage, and established its condition, the next step is finding comps. Based on experience and having completed hundreds or thousands of appraisals, the appraiser can identify the highest-valued features of the property. Views, pools, decks, home theaters, energy efficiency, location, and proximity to shopping are all important components of a valuation, but appraisers must also look at construction quality, the quality of appliances, and all of the interior features that will influence value. Then there’s the perceived value of features homeowners ask the appraiser to include in the valuation, features the appraiser may or may not want to include.

Once the list of features is assembled, the difficult task of finding comps begins. Appraisers generally try to abide by the “not-older-than-six-months” rule, but that’s not always possible. When comps are sparse, the next best option is the Cost Approach.

Using resources like the Marshall & Swift “Residential Cost Handbook” or the “National Building Cost Manual,” appraisers can use various online data tools to determine the replacement cost of improvements and all of the features/amenities. However, the Cost Approach may not work well to estimate the value of a large custom luxury home because most construction cost manuals focus on replacement cost, not reproduction cost — two very different valuations. Lenders rely on the experience and knowledge of the appraiser to provide the best possible value estimate, but appraisers also look to listing and selling agents whose market knowledge can provide keen insights that impact the final value estimate, especially agents who specialize in these markets.

In the end, appraisers must weigh each of the three approaches to estimate value. The appraisal process is both a science and an art, and there’s a reason the conclusion is called a “Final Value Estimate.” One day, an appraiser may have so much information that they can remain very scientific with their final valuation. The next day, comparables may be sparse, driving the appraiser to rely more heavily on the Income and/or Cost Approach to value.